Sunday, August 07, 2011

I am disappointed that American politicians, pundits and economists, on both the left and right, are condemning Standard & Poor's for lowering the US debt rating. It's like being arrested for a crime that you committed and then calling a press conference to say you're disappointed in the police for arresting you.

There are all kinds of valid criticisms of S&P, but they're moot. Last week, the US government came within hours of defaulting on its debt. That's enough to downgrade its credit rating. Worse, the agreement that broke the impasse in Congress is highly dubious and doesn't bode well for future economic or political well-being of the United States.

There was never any question about the US being unable to pay its debt. This crisis was wholly political and wholly manufactured, and yet very real. Hyperpartisanism and a weak president have made the US a riskier place to invest.

Obama is facing an incredibly difficult situation - an inherited economic crisis, an inherited war, a long-term slide in US fortunes, and an invigorated extremist opposition - so I'm not saying his job is easy, but he just doesn't seem up to it.

So what could the US president have done? Here are a few thoughts...

The 14th amendment, which prescribes the debt ceiling and which was passed in 1868 for very different reasons than exist today, creates a situation that is almost unique in the world: after agreeing to and implementing a budget, the US government has a separate process to agree on the amount of money it can borrow to pay for the budget. The debt ceiling doesn't prevent the government from contracting financial obligations; it prevents it from paying what it owes. It's bad government, and some constitutional scholars believe that the supreme court would overturn it if asked.

After the last midterms Obama should have seen this debt ceiling crisis coming, and taken action in advance. He could have taken steps to get it overturned. He could have taken a page from Dick Cheney's playbook and unilaterally adopted more executive power. He could have paved the way with a PR campaign. He could have bluffed, telling the Republicans that if they didn't agree to a compromise then he'd raise the debt ceiling himself. You might say that the Democrats are hoist on their petard since they voted against raising the debt ceiling in 2006, but that's all the more reason to get out in front of the issue early.

It boggles the mind why the Democrats are continuing to try to be even-handed, compromising negotiators when dealing with the tea party. Obama was reactive throughout the negotiation, and in the end he even praised the agreement that broke the impasse (which gives extraordinary budget-cutting power to 12 members of congress).

US debt could be easily curtailed by (1) rolling back the Bush tax cuts on the rich, which were supposed to expire in 2012, anyway; and (2) reducing the military budget.

Republicans have been able to paint Democrats as reckless spenders, turn the military budget into a sacred cow, and make it nearly impossible to increase taxes. The Democrats could have countered all that. They could have played hard ball. They could have provided better leadership.

It's a good thing that Standard & Poor's downgraded the US credit rating because when a country is that irresponsible and dysfunctional, there should be repercussions. Both parties need a wake-up call. And Americans should be mad as hell. If they had missed the debt ceiling deadline on August 2, it wouldn't just have been bond holders who might have suffered. Medicare, Social Security and unemployment insurance were all on the line, along with the salaries of the military, federal workers, and the rest of the US government's obligations.